The Hindu Business Line : Tamil Nadu continues on reformist trail

Access to funding from multilateral agencies for investment is subject to the State behaving responsibly in fiscal matters. Tamil Nadu's latest Budget gets high marks for heeding the compulsions of fiscal prudence.

THE latest Budget of Tamil Nadu presented by the Finance Minister, Mr C. Ponnaiyan, continues the trend of economic reforms. Last year, the Tamil Nadu Government acted promptly and deftly to set right the serious crisis in which it found itself.

The horror stories one used to hear of persons not receiving salaries or payments for contracts performed for the Government are no longer heard.

They have become history, thanks to a timely turnaround effected by the Government against great odds.

The experience of Tamil Nadu in this regard shows clearly that no Government, especially that of a State, has the luxury of spending beyond its means. Even the Centre cannot for long continue on the path of borrowing to exist — its debt will grow and become impossible to service.

The Keynesian solution of deficit financing to overcome a recession is not anyway open to a sub-national government, even if the Federal Government has the option.

A State's capacity to raise loans is circumscribed by administered limits imposed by the Federal Government and mandated by the Constitution. Nor can it overdraw, except temporarily, on its account from the RBI beyond a limit.

Resort to fiscal stimulus is a privilege, if at all, reserved for the Central Government. It alone has the right to draw on the printing press, albeit within limits, as also to borrow from the central bank. State Governments are constrained by the federal system to be fiscally responsible.

If they step outside the limits, they are open to political risk, in the sense that the Centre can intervene citing financial mismanagement.

Even more compelling than these tactical reasons for fiscal prudence is the strategic consideration that access to funding from multilateral agencies for investment in the State is itself subject to the State behaving responsibly in fiscal matters. The State Government has rightly shed its allergy to funding from multilateral sources, an allergy which had earlier been inspired by fears that it would involve tough actions by the State Government to fulfil the conditionalities, in the sense that revenue expenditure had to be reduced and additional revenues gathered. The Government of Tamil Nadu deserves to be congratulated for its bold decision announced in the last year's Budget, for taking the fiscal bull by its horns.

True, soft options have been rejected as being harmful to the State in the medium and longer run. They deny the State's access to the necessary and available resources given by multilateral institutions for additional investments in infrastructure, be they power, roads, transport or irrigation. Soft options also constrain the State's ability to take on new poverty alleviation schemes.

By taking bold decisions in respect of power tariffs and the like — in particular in dealing with demands for enhanced employee compensation — the State had taken a welcome initiative, which has opened the possibilities of growth with equity and jobs and social security.

In keeping with Fiscal Responsibility Act passed last year, the Budget has presented a medium-term fiscal Plan for the State covering the period 2004-05 to 2008-09. The goals of the Plan are, no doubt, ambitious, albeit desirable.

The Plan intends to wipe out revenue deficit by 2008-09, the goal to be achieved by controlling revenue expenditure and by ensuring enhanced revenue receipts. Fiscal deficit is expected to be confined to a level below 3 per cent of Gross State Domestic Product. Simultaneously, the State expects to have a stepped up capital outlay from Rs 2,051 crore in 2002-03 to Rs 5,051 crore.

The forecasts, no doubt, involve heroic assumptions regarding reduction of expenditure, growth of revenues and Central transfers. They also postulate an estimate of 8-9.5 per cent in the rate of growth of GDP, albeit in nominal terms, which may well be exceeded, given that the national plan projects growth at 8 per cent in real terms, i.e. 12 per cent in nominal terms.

There is one caveat, however. The assumptions in the medium-term fiscal plan should not be turned to the State's disadvantage by the Twelfth Finance Commission. Tamil Nadu's promise of good performance in respect of revenue enhancement and expenditure compression should not be turned against the State to deny it much-needed assistance.

In this connection, the introduction of norms for State revenue efforts as well as expenditure estimates in determining Central devolution, becomes all the more necessary, especially in view of the medium-term fiscal plan by States.

The State Government will have a serious challenge in attempting to achieving the targets set out in the medium-term forecast. Particularly, it has to ensure that capital outlays it incurs give reasonable returns to cover interest and contribute a surplus. Otherwise, more borrowing will mean more interest burden, uncompensated by returns.

Hopefully, the Raja Chelliah Committee on Tax Reforms and Revenue Augmentation has analysed these issues when it made its recommendations. In particular, in regard to adequacy of return on investments, the State has to have a clearly laid-out agenda.

The White Paper published last year made a start. In particular, it has to ensure that investments in TNEB and the Transport Corporations make good returns. This requires a carefully drawn out plan, which has to be courageously implemented.

While on the subject of fiscal balance, it seems necessary to call the attention of the authorities on the need to have an update of the White Paper on State finances issued last year, at least with reference to actions taken on various suggestions made in that Paper.

Such a review will also help highlight the strengths and weaknesses of the State's Financial Stabilisation Plan as it has emerged in the light of experience. Much depends also on the success of the State's innovative subsidy programme, subsidy directly paid to farmers in the eligible category announced last year, now enlarged to cover all farmers.

An action-taken report on this specific programme will be useful to identify what has worked in the field and what has not, and how far it has helped to plug TNEB's leakages of revenue and power.

The State Budget makes a mention of the arguments it has made before the Twelfth Finance Commission. The case for Tamil Nadu is well set out therein.

The State has a difficult task in carrying conviction with the Twelfth Finance Commission on its request for reversing the unjust treatment meted out by the Eleventh Finance Commission.

The Eleventh Finance Commission's bias in favour of "affirmative" action, in the sense that it assured favourable treatment for the backward States at the expense of the (alleged) advanced States has to be revisited. Granted, the Rangarajan Commission will be in a difficult position; Politically it has a tough nut to crack.

Affirmative action in favour of backwardness has to be diluted, if the so-called forward States, like Tamil Nadu, are to be treated fairly. Tamil Nadu is one of the States that were penalised for being better performers, both in respect of tax efforts and control of liabilities. We have, however, to remember that the decisions of the Centre will be based on political considerations, whatever be the professionally-based recommendations of the Twelfth Finance Commission. To bring about a change in the principles of allocation of resources from the convoluted and politically flavoured formula recommended by the Eleventh Finance Commission will call for all the fabled sagacity of the Tamil Nadu Government.

Further, it has to be noted that the State of Tamil Nadu cannot grow merely by depending on the Central transfers. Besides increasing its own collection of taxes and transfers of Central grants, Tamil Nadu has also to access efficiently the pool of extra-Budgetary resources available nationally through developmental financial institutions, in particular, and the banking sector, in general.

In this context, we have to note that experts in the northern and eastern States have often argued that the credit-deposit ratio of Tamil Nadu is far too high. This trend may have changed over time. It is appropriate that we explore how the resource flow has fared over the years, taking resources given by IDBI, ICICI and the NABARD in their totality.

Hopefully, Tamil Nadu continues to be numero uno in this aspect. Otherwise, steps have to be initiated to improve the state of affairs.

All in all, the latest Budget is a significant milestone in the story of Tamil Nadu's progress. One hopes that the Government under the dynamic leadership of the Chief Minister, Ms Jayalalithaa is able to translate its good intentions into reality.

On the success of the efforts depends the State's chances of surmounting the challenges of economic growth with justice, meeting the increased obligations to the poor, which have arisen as a result of globalisation and incidentally of economic reform itself. Only then, can Tamil Nadu hope to achieve the globally acclaimed millennium goals of development in respect of attaining not only a higher level of income, but also an improved quality of life — goals that the Budget has rightly set before the State.